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Facebook Caught in Social Media Web of Deceit

Muhammad Bazil

Muhammad Bazil

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Shakespeare put it best when he sagely proclaimed: “All that glitters is not gold.” He really could have been talking about Internet social media IPOs.

Social media platforms were the seriously-hyped darlings of analysts and investors at the beginning of the year, and Facebook (FB) was the king of all Internet social media. When the company went public in mid-May 2012, it was one of the most highly anticipated initial public offerings in history. The fact of the matter is that investors would have done well to remember Groupon (GRPN), which had gone public in November 2011.

At the time that FB went public, the now ailing deal-of-the-day company was already experiencing the embarrassing backward slide that is the hallmark of its performance to this day. A month after Groupon went public, another much hyped social media company, San Francisco-based game business Zynga (ZNGA), whose games are featured prominently on Facebook, tossed its hat into the public arena. Today, less than a year later, it is trading at the level of a penny stock.

The concerns about social media investments are many and valid. Revenue and user growth have slowed considerably. So what happened with Facebook?

The IPO was priced at $38 per share and investors were certain that the stock was poised to skyrocket. The company raised over $16 billion making it the third largest IPO in U.S. history behind Visa (V) and General Motors (GM). At the end of the first day of trading, analysts were left scratching their heads and shareholders were suffering from what can only be described as the equivalent of shell shock. The stock that opened at $38, went as high as $45 and closed at barely above its IPO at $38.02.

Today, five months later, the stock is selling at around $19, half of its IPO. Early investors and employees are anxious for December and the lifting of restrictions on the sale of their collective shares. The market will then be flooded with twice the shares available now, which could conceivably add impetus to the company’s downward trend. To add to Facebook’s woes, dozens of shareholders have filed suits against them and the banks that led the IPO. A class action lawsuit was filed alleging that Facebook told underwriters to reduce their 2012 performance estimates because mobile app consumers were not generating advertising revenues. Shareholders involved in the lawsuits claimed that they did not get the same data on the IPO that the underwriters received. To date, the company has been hit with some 50 suits all alleging its investors were harmed by not being told that mobile usage could adversely affect the price of the stock.

What happened is really no great mystery. A combination of moves put the company where it is now. Facebook’s financial advisors badly misjudged the market. Then, at the last minute the company decided to sell 25 percent more shares than originally announced. Morgan Stanley (MS) then priced the shares at an extremely aggressive $38, highly overpricing the stock and maximizing Facebook’s take at $16 billion.

On the first day of trading, NASDAQ’s trade order system failed. This caused investors to lose millions of dollars. All of these issues combined with allegations of failure to disclose, has left the company climbing a very slippery slope. Experts are now pointing out that there were really very few long term investors in the company on the first day of trading. They maintain that IPOs are good-looking investments to many folks who want to get in on what is seen as a possibly profitable stock while the price is low, and then get out as quickly as possible, hopefully with a tidy profit on their investment.

The bottom line is that investing in IPOs is a dicey undertaking. Facebook, Groupon, Zynga and many others are proof of this. Even the most sophisticated investors took a beating on their Facebook investment. An investment is a matter of research and timing and there are no guarantees for anyone. In other words, nothing is a sure thing. In the end, the biggest crime that Zuckerman and company committed was greed. In the long-term, Facebook is not going anywhere. The social media giant is too popular and really does attract advertising revenue. Hopefully this has been a lesson learned and the company may turn out to be a viable long-term investment. Only time will tell – and December.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
It's no different than buying a house where the game is rigged in favour of the sellers and agents who profit from higher, not lower prices. Their vested interest is to, as Buffett would say, 'put lipstick on a pig.' No one works on behalf of the buyers. With the latest IPOs the new shareholders should have received a fairer degree or allocation of company ownership or paid less for their shares.

As such, if the current Facebook share price is closer to fair value, then Zuckerberg should have had to give up twice as much ownership or made 50% less, instead he profited immensely off the hype, taking in loads of cash while retaining a good sized chunk of his company. If the rumours of how Facebook got its start are correct, then new investors should have expected less than honourable and fair dealings in the IPO. No matter, he must have laughed all the way to the bank. The underwriters, knowing that there are few mega deals like Facebook in the pipeline and knowing that a stack of dollars today is worth far more than a fleeting tarnished reputation tomorrow must also also have been laughing heartily at the prospect of taking candy from investment babies.

I for one don't believe the advisors misjudged the market, they anticipated the market, if not made the market. Just note the degree of underpricing that occurred with the earlier, but much smaller IPOs. (I wish I could let you folks see my string of e-mails to friends telling them to look at the earliest big social media IPO as it was natural that in anticipation of the huge Facebook IPO that the early one would very likely see dramatic gains, all as part of a dramatic buildup to the grand Facebook show. The age old loss-leader game.)

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